It seems like no matter how much I slaughter the incoming attacks every X number of minutes, when they return, the count down happens, and a new army of greater size comes out. Do the NPCs play with the same rule sets, or are these armies just made out of nothing when they need them?

in Kingdom Wars NPCs play the game as a team - and while it`s really hard to get started, once you control 2-3 towns you`ll be able to pump out the armies as fast as NPCs do. And yes - AI does cheat a little bit on medium and hard difficulty to keep up with the player.